Brennus

China Security and Surveillance Systems: Best Opportunity I've Seen In Years

My notes show CSCT did a financing with Citadel for a nominal amount of senior convertible notes. The notes are convertible at $23.60 per share & due 2012. If the notes are not converted before they come due the company (CSCT) must repurchase them at a price which provides 15% CAGR to the lender. There are mandatory conversion clauses if the stock price is $40 in february of 2010 or $45 in february 2011. Cash interest payment on the notes is 1% annually.

According to GAAP, CSCT have to record interest expense as if the make-good, repurchase bogey were an actual cash expense. Which is to say they are recording interest expense as if they were paying 15% on the note when in reality cash interest expense is only the 1%. That's a lot of dough...17MM annually & 4.25MM per quarter.

Per their most recent 10q, basic share count was 34.94MM. So we are talking about a 12 cent per share non-cash interest expense charge every quarter. You mention a 17x 2007 EPS multiple...does your 2007 EPS model contemplate this non-cash charge to earnings or do you back it out (since it's non-cash)? If you're rolling it in & still think the company will earn ~ a buck on 07, this stock really is a buy.